Today the News Observer ran the opinion piece entitled “Too much tax slack” arguing against the universal tax breaks for businesses enacted by the North Carolina Congress. The general complaint of this article centered around the relatively common idea that wealthier businesses and individuals save this money rather than spend it; to supporters of this idea saving is bad because it does not return to the economy in the form of consumption. Several aspects of this argument need to be addressed including the incentives such policies create, the positive impact of budget constraints, and, finally, the importance of saving.

First, those who stand against this policy and prefer to limit tax breaks to those earning less than $825,00 in profit per year fail to recognize the incentive that this policy creates. In allowing the tax breaks to apply to all sizes of business this policy encourages all businesses to be as profitable as possible, whereas a policy with an earnings bar discourages companies from expanding at a marginal level where the benefit of expanding would not be worthwhile unless it exceeded the amount of the tax. Additionally, by allowing tax breaks for all employers, the policy has the effect of encouraging all sizes of business to open in North Carolina.

Secondly, addressing the author’s dismay that the policy generates no revenue for the state is a benefit many citizens fail to appreciate: a constrained budget. It is essentially common knowledge that government agencies will spend less efficiently than the private sector. At fundamental level this makes sense: when costs are zero a resource will be overused and abused. Money spent throughout the state does not come entirely out of the pockets of its legislators; therefore, there is hardly incentive to spend sparingly especially when special interests are involved. The solution here is a watchdog citizenry that holds its legislators more accountable for its spending decisions. From this perspective, a constrained budget is not a problem it is a benefit because it disallows unnecessary spending.

Finally, standing against the argument that the savings hinder the economy by failing to create consumption, is the way in which savings are used within the economy. In the editorial piece this post addresses, the author believes savings to be bad because, they go into account where they are never again used. This fails to recognize that most savings will be used for future consumption, particularly for a good that is demanded (or wanted) by the individual rather than a good undesired by the individual. Additionally, the author does not consider the present use of savings as a means for banks to disburse loans. Overall, more savings have the effect of lowering the interest rate and encouraging investment.

It is a common belief held by citizens throughout the country that tax breaks for the wealthy are unhealthy for the economy; however, based on the incentives such policies create, the benefits of constrained budgets, and the overall benefits of savings, this belief is hardly true. In allowing tax breaks for all sizes of businesses the North Carolina Congress made a positive decision on the basis of efficiency and of fairness.